Despite open uncertainty about potential regulatory and monetary policy changes under the new administration, interest in the loan purchase/correspondent investor market remains high. Early this year, credit ratings agency DBRS predicted that 2017 would see a resurgence in the residential mortgage-backed security (RMBS) market, citing the tendency of rising interest rates to drive down refinances and make securitization more financially appealing. In April, data from Standard & Poor’s Global Ratings confirmed that RMBS issuance in the first quarter of 2017 was double that of the same period in 2016.
From Ventana Home Mortgage to GSF Mortgage, nearly a dozen loan aggregators and investors have announced plans to grow or launch a correspondent channel in the last few months. With crisp execution, this business channel should be less expensive, with higher profitability than wholesale and retail branch operations.
One option more and more firms are considering – especially when first entering the purchase market – is hiring a vendor partner to support the entire back-shop functionality.
Outsourcing offers tangible benefits
Outsourcing arrangements have the potential to deliver to investors an array of benefits. First, consider that typical back-shop functions include receiving and indexing document images, conducting pre-purchase review, coordinating the satisfaction of closing conditions, approving and denying purchase notifications, and providing seller performance analytics. Transferring these important but often administrative responsibilities to a vendor frees correspondent investors to focus their efforts on relationships and other critical aspects of the transaction.
Outsourcing also allows investors to take advantage of a variable and contained cost structure. Rather than spending time and money building out infrastructure (identifying space, recruiting and hiring employees, buying equipment, training, etc.), investors can partner with a vendor that’s already fully outfitted. Further, typical outsource contracts use a per-unit pricing model, introducing variability to the cost structure and giving investors peace of mind that resources will remain at full utilization rates.
Timing is key for organizations entering a new business channel, and outsourcing can easily shave months off a firm’s entry timeline. One example of this type of service is our firm’s “correspondent in a box” option, often used by firms activating a new correspondent business. The service offers all of the components needed for sellers to start delivering within a matter of weeks, including a technology platform with optical character recognition technology and exception-based conditioning and rules. Investor loan programs are compiled within the system, and monthly analytics can be used to drive seller scorecards and decision-making.
At a time when seasoned back-office personnel is scarce and at a premium, outsourcing can have recruiting advantages, as well. Expertise in the correspondent channel is a rare commodity that requires knowledge of multiple programs and an understanding of multiple investor approaches. Effective communication with sellers is also critical insofar as back-office staff serve as representatives of their investor clients. Firms often find that a limited supply of these specialty skills in the local talent pool is a real obstacle to standing up a new correspondent investment channel. Fortunately, vendor partners often have access to an employment base that differs from their client firms’ geographical footprint, allowing for quicker identification and hiring of appropriate talent.
Cultivating a close relationship with a trusted vendor team increases the value of the outsourcing arrangement for investors over time. For example, strong vendor relationships might evolve to include assistance with such tasks as upfront counterparty due diligence and risk assessment or even improving the process of organizing and assessing seller application packages to expedite decisions.
Choosing the right vendor partner
The current cycle promises rewards to correspondent investors that can move confidently with the knowledge that their back-shop T’s are crossed and I’s dotted. How, then, should firms go about selecting the right third-party partner?
Before choosing the vendor with which one will entrust his business – or at least his new business channel – it’s critical to first identify what is important to the firm. A thorough understanding of one’s needs should guide the development of one’s request for proposal, as well as one’s evaluation of each vendor’s information or live presentation. Using a standard scorecard approach is a best practice to ensure consistency across all assessments. The scorecard should allow vendor-by-vendor comparison on the following mission critical criteria:
- Does the vendor have experience with correspondent/conduit business processes, flow and responsibilities?
- Do managers and team members have specific experience with pre-purchase review? and
- Can the vendor provide client references to support its claims?
Investment in technology
- Does the vendor use a system specifically designed for due diligence rather than improvising with old technology or spreadsheets?
- Is the system up to date with critical regulatory developments, such as TILA-RESPA Integrated Disclosure rule comparative analysis?
- Does the system incorporate a rules engine that integrates investor loan program guidelines? and
- Can the vendor furnish evidence of its information security certifications, protocols and commitment to ISO standards?
- Is all work completed by tenured industry experts at a fully SAFE ACT-compliant, onshore location? (The vendor should furnish licensing information as evidence.); and
- Does the vendor provide its services on a “private label” basis?
Project management support
- Does the vendor provide a well-organized implementation plan for onboarding your business?
- Is the plan executed by a dedicated project manager? and
- How often does the vendor conduct performance reviews to identify and resolve gaps or challenges related to onboarding and/or ongoing performance?
- Mortgage finance will always be a business of cyclic opportunity that requires successful organizations to think and act with agility. An agile mind set helps companies identify opportunities – such as the promise of today’s purchase market – as they arise. An agile outsourcing partner can help savvy investors translate opportunity into profit by cost-effectively supplying exactly the right expertise at exactly the right time.
Debora Aydelotte is chief operating officer of Altavera Mortgage Services, a Computershare company providing outsourced loan origination and due diligence services, including closed loan review. She can be reached at email@example.com.